The IMF Has a Stronger Case for High Multipliers Right Now than It Knows

Gauging the multiplier: Lessons from history: The IMF grabbed headlines and upset officials earlier this month when it released an analysis which concluded that, starting in 2009, the fiscal policy multiplier has actually been considerably larger than previously supposed (IMF 2012). The Fund’s new estimates, which range from 0.9 to 1.7, suggest that Europe’s policies of austerity are in fact directly responsible for the fact that the continent’s recessions have been even deeper than initially forecast.

We are shocked – shocked – to find that there’s multiplication going on in here.

Actually, not so shocked. This is of course just what standard theory would suggest: that the fiscal multiplier will be unusually large when there is little monetary response to the fiscal impulse, whether because interest rates are at the zero lower bound or for other reasons….

The IMF’s analysis… relies on observations for only a handful of national experiences…. [H]istory provides more evidence on the relevant magnitudes. In a paper written together with Miguel Almunia, Agustin Bénétrix and Gisela Rua, we considered the experience of 27 countries in the 1930s, the last time when interest rates were at or near the zero lower bound, and when post-2009-like monetary conditions therefore applied (Almunia et al. 2010)….

[Fiscal policy] was tried, in Japan, Italy, and Germany, for rearmament- and military-related reasons, and even in the US, where a Veterans’ Bonus amounting to 2% of GDP was paid out in 1936…. [W]e estimate panel vector regressions… we estimate the response of output to government spending using a panel of annual data and defence spending as an instrument for the fiscal stance…. [O]ur estimate of the multiplier is 1.6…. These estimates based on 1930s data are at the higher end of those in the literature, consistent with the idea that the multiplier will be greater when interest rates do not respond…. The 1930s experience thus suggests that the IMF’s new estimates are, if anything, on the conservative side...

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Gauging the multiplier: Lessons from history: The IMF grabbed headlines and upset officials earlier this month when it released an analysis which concluded that, starting in 2009, the fiscal policy multiplier has actually been considerably larger than previously supposed (IMF 2012). The Fund’s new estimates, which range from 0.9 to 1.7, suggest that Europe’s policies of austerity are in fact directly responsible for the fact that the continent’s recessions have been even deeper than initially forecast.

We are shocked – shocked – to find that there’s multiplication going on in here.

Actually, not so shocked. This is of course just what standard theory would suggest: that the fiscal multiplier will be unusually large when there is little monetary response to the fiscal impulse, whether because interest rates are at the zero lower bound or for other reasons….

The IMF’s analysis… relies on observations for only a handful of national experiences…. [H]istory provides more evidence on the relevant magnitudes. In a paper written together with Miguel Almunia, Agustin Bénétrix and Gisela Rua, we considered the experience of 27 countries in the 1930s, the last time when interest rates were at or near the zero lower bound, and when post-2009-like monetary conditions therefore applied (Almunia et al. 2010)….

[Fiscal policy] was tried, in Japan, Italy, and Germany, for rearmament- and military-related reasons, and even in the US, where a Veterans’ Bonus amounting to 2% of GDP was paid out in 1936…. [W]e estimate panel vector regressions… we estimate the response of output to government spending using a panel of annual data and defence spending as an instrument for the fiscal stance…. [O]ur estimate of the multiplier is 1.6…. These estimates based on 1930s data are at the higher end of those in the literature, consistent with the idea that the multiplier will be greater when interest rates do not respond…. The 1930s experience thus suggests that the IMF’s new estimates are, if anything, on the conservative side...

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